Accounting for Biological Assets and Agricultural Produce (LKAS 41: Agreeculture) Rangajewa Herath B.Sc. Accountancy and Financial Management(Sp.)(USJ) MBA-PIM(USJ)

Main Accounting Issues Since biological assets are unique in nature, do they need a dedicated accounting standard? How should biological assets / agricultural produce be classified and presented in financial statements? How should biological assets /agricultural produce be measured? When and how should the gain or loss arising from fair value changes of biological assets / agricultural produce be recognized? What are the disclosures to be made in relation to biological assets ? Rangajeewa Herath

Scope of LKAS 41/ Revised IAS 41 Applied to account for the following when they relate to agricultural activity: Biological assets except for bearer plant; Agricultural produce at the point of harvest; and Government grants covered by Paragraphs 34 and 35. Rangajeewa Herath

Agricultural Activity (Paragraph 5) The management by an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. Biological transformation comprises the processes of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset. Harvest is the detachment of produce from a biological asset or cessation of the biological asset’s life processes. Rangajeewa Herath

Agricultural Activity (Contd.) Covers a diverse range of activities Common features exist within this diversity: Capability to change (living animals and plants are capable of biological transformation.) Management of change (enhancing or stabilizing conditions necessary for the process to take place) Measurement of change (change in quality or quantity brought about by biological transformation or harvest) Rangajeewa Herath

The Nature of Biological Assets A living animal or plant. Biological Asset The harvest of the entity’s biological assets Agricultural Produce Rangajeewa Herath

Products arise due to processing after harvest Agricultural produce Biological asset Products arise due to processing after harvest Rangajeewa Herath

Products arise due to processing after harvest Agricultural produce Biological asset Products arise due to processing after harvest Rangajeewa Herath

The Nature of Biological Assets (Contd.) Agricultural produce Products arise due to processing after harvest Sheep Wool Yarn, Carpet Dairy cattle Milk Cheese Trees in a timber plantation Felled Trees Logs, Lumber Fruit trees Picked fruit Processed fruit Tea bushes Leaf Tea Tobacco plant Crude tobacco Grape vines Grapes Wine Oil palms Picked Fruit Palm oil Rangajeewa Herath

Bearer Plant Bearer plant is a plant that : Is used in production or supply of agricultural produce; Is expected to bear produce over one accounting period and; has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. ( Revised IAS 41) Rangajeewa Herath

Bearer Plant (Contd.) The following are not bearer plants: plants cultivated to be harvested as agricultural produce (e.g. trees grown for use as lumber); plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (e.g. trees that are cultivated both for their fruit and their lumber); annual crops (for example, padddy and wheat). Rangajeewa Herath

Unique Characteristics Natural capacity to grow and/or procreate has an impact on value Great deal of increase in value of resulting from the input of free goods Many costs early in the life, economic benefits until many years later Long production (growing cycle) of assets Not necessarily any relationship between the expenditure and ultimate benefits Rangajeewa Herath

Recognition (Paragraph 10) An entity shall recognize a biological asset or agricultural produce when and only when: The entity controls the asset as a result of past events; It is probable that future economic benefits associated with the asset will flow to the entity; and The fair value or cost of the asset can be measured reliably. Rangajeewa Herath

Measurement Biological Asset Fair value less costs to sell on initial recognition and at the end of each reporting period except in the case described in Paragraph 30 where fair value can not measures reliably. (Paragraph 12) Biological Asset Fair value less costs to sell at the point of harvest. (Paragraph 12) Agricultural produce Rangajeewa Herath

Definition - Fair value (SLFRS 13) Fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Particular asset or liability Orderly transaction (not a forced sale) Market participants (market-based view) Price (exit price) Rangajeewa Herath

Inability to Measure Fair Value Reliably Presumption - fair value can be measured reliably for a biological asset. If fair value of a biological asset cannot measured reliably - measure at cost less accumulated depreciation and accumulated impairment losses. (Paragraph 30) The presumption in Paragraph 30 can be rebutted only at initial recognition. Rangajeewa Herath

Gains and Losses arising from measurement at fair value less costs to sell Biological Assets Arising on initial recognition and from change in fair value at the end of reporting period Included in profit or loss for the period in which it arises (Paragraph 26) Agricultural Produce Arising on initial recognition Included in profit or loss for the period in which it arises (Paragraph 28) Rangajeewa Herath

Disclosure (Paragraphs 40 to 57) Description of each group of biological assets. Quantitative description of each group of biological assets. - between mature and immature biological assets -between consumable and bearer biological assets ( applicable for Livestock) Rangajeewa Herath

Bearer biological assets Mature biological assets Disclosure (Contd.) Consumable biological assets Harvested as agricultural produce or sold as biological assets. (e.g. livestock held for sale or livestock held for the production of meat) Bearer biological assets Not agricultural produce but, rather, held only for bearer produce. (e.g. livestock from which milk is produced) Mature biological assets Attained harvestable specifications (for consumable biological assets) or sustain regular harvest (for bearer biological assets). Rangajeewa Herath

Summary Unique characteristics of biological assets Resulting accounting issues Addressing those issues through LKAS 41 -Agriculture Rangajeewa Herath